Investor Insights - Monthly news for investment professionals 4 June 2015

Every investor knows that market volatility is a part of life. Investors will also know that if their portfolio drops by 50%, they need a 100% increase on what’s remaining just to get back to square one! Yes, investors understand Volatility.

But Volatility is much more than just shares going up and down. All financial instruments contain degrees of volatility and this in turn affects investors in varying ways.

In this edition of Investor Insights, we take a look at volatility, risk and alternatives investors may like to consider.


Markets price for foreseeable events. Impending rate cuts, likely currency values, political results and economic indicators are analysed ad infinitum and any likely volatility taken into account in prices. Unforseen or irrational events create the greatest level of volatility. ‘Unknown Unknowns’, as Donald Rumsfeld may have put it.

‘Unknown-unknowns’ include political unrest, global economic events, weather events, war – the list goes on. These shocks can create global volatility and present the investor with more than a mere headache.

A quick look at the below chart covering the All Ordinaries over the last 33 years shows that the biggest movements in the index are from events which are difficult – or even impossible – to predict.

(Source: http://www.asx.com.au/documents/resources/share_price_movements.pdf)

Measurements of financial volatility.

Volatility, simply put, is the variance of returns expected for a particular asset or market index. There are numerous ways of measuring volatility with varying degrees of complexity. Most begin with assessing the historical volatility of a particular stock or index and then use that information to look forward into the future. A common approach is to measure returns against the likely returns of the market on the whole, or, the Beta coefficient.

Friend or Foe?

For the right investor, volatility can be a friend. Assets with higher perceived volatility will usually offer a higher return and the canny investor can do very well. An investor’s risk profile is important here.

There are some cases where volatility is no friend at all.

Investing for income & the hunt for yield

If you rely on investments to generate your income, volatility is something you can do without. Much has been written about the ‘Hunt for Yield’. In the current low-rate environment with many capital stable investments barely out of negative real return territory, investors are increasingly turning to ‘riskier’ assets to generate income.

An example of this exists in SMSF asset allocation, with the following table demonstrating the move away from cash and into shares since 2008:

Asset 31 Dec 2008 31 Dec 2014 Movement
Cash 30% 27.6% -2.4%
Shares 27% 31% +4.0%
(Source: ATO)

There is a concern that investors are abandoning risk profiles for the sake of income and increasing their exposure to undue risks. We all need to eat, but one wonders if the full array of products available for constructing a properly diversified portfolio are being considered.

Transitioning to retirement – Sequencing Risk

All of us at some time will be looking forward to retirement. In the years where retirement is becoming imminent, volatility brings about ‘Sequencing Risk’, or, the risk that the timing of losses is unfavourable and results in less money for retirement. This is particularly pertinent for Australian investors, as 76.1% of singles and 41.9% of couples run out of savings in retirement (Burnett, Davis, Murawksi, Wilkins & Wilkinson, 2013).

Referring back to the ASX chart (above), if an investor held shares representing the ASX in 2007, by 2008 their portfolio would have decreased in value by 50%. What’s more, fast forward to 2015 and they would still be behind where they were in 2007! This can be catastrophic for those nearing retirement who do not have the luxury of time to make up losses.

Reliable, low-volatility returns are very attractive to these investors to ensure their portfolios maintain their value as they near retirement.


Most financial strategists agree that volatility is best addressed using diversification – selecting the right product mix to ensure the aims of the investor are achieved and the risk profile is being addressed. The following product types are typical fixed-income alternatives many investors will consider.

Exchange-traded Products

ETPs or Exchange Traded Funds (ETFs) are an increasingly popular means of building simple diversification. These products invest in a selection of assets to mimic the returns offered by a particular index or benchmark and in doing so investors gain comfort in the assumption that any losses they experience will not be out of synch with any wider market move.


Bonds of varying types have long held a position in most investor’s portfolios. However, with interest rates likely to be upwards from here care needs to be taken to ensure the market value of the bonds selected do not devalue in the years ahead.


These are relative new comers in the context of financial instrument history, increasing in popularity only in the past ten years. Each hybrid issuance is subject to its own terms and conditions, so requires full investigation each time especially regarding conversion events.

Term Deposits

Term deposits offer a low-volatile option for investors and have long been the prime product in fixed interest investment. Add the Government Bank Guarantee for investments up to $250,000 and from a volatility perspective there is very little to worry about. However the current low rates on offer are a serious detraction for investors as they are often behind the rate of inflation and therefore investors can see the real value of their investments decreasing over time in this current environment.

La Trobe Financial – low volatility investing

The flagship product of La Trobe Financial is our Pooled Mortgages Option (PMO), which is currently returning a variable 5.40% per annum with monthly income distributions. The PMO is designed to take advantage of the outstanding risk/return characteristics of the Australian property credit market, with an investment strategy based on conservatism.

With its high level of capital stability and a strong premium to cash the PMO offers, monthly income for investors with low volatility. Whilst past performance is no guarantee of future performance, as the graph below demonstrates, the PMO has delivered returns with exceptionally low absolute return volatility since inception in 2002. Importantly, its performance profile has notably low correlation to other asset classes and has acted to stabilise portfolio performance both in market peaks and in market troughs.

Every investor will be affected by volatility in some way through their investment lifetime. Addressing the risks volatility creates should be a key consideration of the considered investor. As always, creating a clearly articulated financial plan which addresses these risks, which is regularly reviewed and is backed up with thorough asset allocation should place you in good stead.

Best regards,

Chris Andrews
Vice President,
Chief Investment Officer

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Ratings And Awards

The above awards and ratings were given to the Pooled Mortgage Option within the La Trobe Financial Mortgage Fund and may be viewed

La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. The PDS is available on our website www.latrobefinancial.com or by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.

- The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund and may be lower than expected. Investors risk losing some or all of their principal investment. The investment is not a bank deposit.
- Past performance is no guarantee of future performance.
- Withdrawal rights are subject to liquidity and may be delayed or suspended.
- The award and ratings were given to the Pooled Mortgages Option within the La Trobe Australian Mortgage Fund.
- Any rating is only one factor to be taken into account in deciding to invest.

1. Zenith's "recommended" rating indicates that it has high confidence in the manager meeting its objectives. The Zenith Investment Partners ("Zenith") ABN 60 332 047 314 rating referred to in this document is limited to "General Advice" (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of the financial product on this basis. It is not a specific recommendation to purchase, sell or hold the relevant product(s), and Zenith advises that individual investors should seek their own independent financial advice before investing in this product. To view the relevant research information, please visit www.latrobefinancial.com The rating is subject to change without notice and Zenith has no obligation to update this document following publication. Zenith usually receives a fee for rating the fund manager and product against accepted criteria considered comprehensive and objective.
2. SQM Research - 4 stars to 4.25 stars - superior, suitable for inclusion on most Approved Product Lists. To view the relevant research information, please visit www.latrobefinancial.com This rating will not take into account your, or your clients' objectives, financial situation or needs. It is up to investors to consider whether specific financial products are suitable for your objectives, financial situation or needs. Research houses receive a fee from La Trobe Financial for rating the product.
3. Lipper Leaders Rating Total Return (Score – 5) Lipper Ratings for Total Return reflect funds’ historical return performance relative to peers. The ratings are subject to change every month. The highest 20% of funds in each peer group are named Lipper Leader or a score of 5 for Total Return. Lipper Leader ratings are not intended to predict future results and does not guarantee the accuracy of this information. More information is available at www.lipperweb.com. Thomson Reuters Copyright, All Rights Reserved.
4. Australia Ratings (AFSL 346138) makes every effort to ensure the reliability of the views and rankings expressed in its reports and those published on its websites. Australia Ratings research is based upon information known to it or which was obtained from sources it believed to be reliable and accurate at time of publication. However, like the markets, it is not perfect. This report is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore discuss, with their financial planner or advisor, the merits of each rating for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Australia Ratings and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information within the report whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Australia Ratings hereby limits its liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.
La Trobe Financial is one of Australia's leading independent credit specialist Fund Managers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 150 staff and has managed over AUD$10 Billion covering over 100,000 investment grade assets since inception in 1952.

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